Understanding and Securing Financing
From the beginning of your home search, particularly as a first-time buyer, you probably realize you're going to need a mortgage to make your home ownership dream a reality. Do you know what documents you'll need to provide to the lender? Do you know how the lender will determine how much mortgage you can afford?
Your mortgage broker has tools to help you in your home search. Before you go house shopping, you want to know how much of a mortgage your income will support, and what affect your current debt load will have on a possible mortgage amount. You can find this out by getting a mortgage prequalification.
- A mortgage prequalification is tentative approval from a lender for a mortgage based on your qualifications (i.e. income, down payment amount) made in advance of a real estate purchase. The prequalification will provide you with the information needed to know how much of a mortgage you will likely be approved for; it’ll help you ensure you’re shopping for homes you can afford.
A prequalification is not the same as receiving approval for a mortgage; it is not a guarantee a lender will enter into a mortgage contract with you. Once you make an offer to buy a property, you will formally apply for a mortgage, and you will have to submit supporting documentation that confirms your financial position. A lender might choose not to approve you for a mortgage after it more closely assesses you and/or the property.
After you choose either a bank financial specialist or a mortgage broker to work with, get your paperwork in order. You may need to have certain documents available when you seek a mortgage prequalification, and you will definitely need them when you apply for the mortgage – these include:
- proof of employment (for example, a letter from your employer)
- most recent Canada Revenue Agency Notice of Assessment
- confirmation of income (for example, pay stubs or a T4)
- gift letter (if you’re using a gift as your down payment)
Lenders will review these documents, along with other items such as your credit report, in order to determine how much of a mortgage you can afford. They will also review a couple of key calculations to make that determination:
Gross Debt Service (GDS) Ratio: Lenders use a borrower’s GDS to determine whether the borrower has an acceptable debt level. Your GDS is the percentage of your gross monthly income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes, heating, and half of your condominium fees (if applicable). Generally, for a lender to consider you for a mortgage, your GDS should be no more than 35% of your gross monthly income.
Total Debt Service (TDS) Ratio: Lenders also review your TDS ratio. Your TDS is the percentage of your gross monthly income needed to cover your monthly debt load, which includes your housing costs, plus all of your other debt payments (car loan or lease, student loans, lines of credits, etc.). Your TDS should not be more than 42% of your gross monthly income.It is unlikely a lender will approve a mortgage if the mortgage puts your GDS above 35% and your TDS above 42%.